Move Over Apple Suppliers: Best Taiwan Gains Are in Paperby
Taiwan’s paper shares outperform Apple suppliers this year
‘Multi-year bull market’ seen for Asian paper mill equities
In an equity market dominated by Apple Inc. suppliers, investors are getting the biggest gains by going low-tech.
Since a Chinese government crackdown on water pollution late last year that shuttered some paper mills, manufacturers including Long Chen Paper Co. and Paolung International Co. have rallied and may see a bull run for years to come, according to investors. The trend is showing in Hong Kong as well, where Nine Dragons Paper Holdings Ltd. surged 28 percent in January.
Taiwan’s paper and pulp index has climbed 19 percent so far this year, compared with a 14 percent gain in the biggest 10 suppliers to Apple Inc., including iPhone maker Hon Hai Precision Industry Co.
Paper mills use vast amounts of water from the beginning of the process when wood is mixed into a slurry. Smaller mills operating in China were shut down by the mainland government in a series of moves aimed at curbing environmental waste, resulting in a reduction of supply and an increase in prices.
“It could be a multi-year bull market for paper stocks, spreading from Taiwan to Hong Kong,” said David Lu, senior vice president at Taipei-based Hua Nan Investment Trust Corp., which manages NT$50 billion ($1.6 billion) of assets.
The surge in Taiwan paper stocks began in late December, when Xinhua reported that China was seeking to double fines on water pollution. Visits from government inspection teams disrupted supply, triggering a rally in the commodity’s price, Huatai Financial Holdings Ltd. analysts Gong Jie and Yu Liang wrote in a Jan. 24 note.
In addition, some paper packaging plants in southern Guangdong province were forced to shut, according to industry portal Paper.com.cn. The measures were part of a broader campaign announced in March by Chinese Premier Li Keqiang, after he listed improvements to the environment as a key target in the nation’s five-year plan.
On Jan. 23, Nine Dragons Paper said its six-month net income will rise at least 45 percent from a year earlier. The forecast trumps analyst estimates, thanks to a more than 40 percent rally in paper prices in the last two months of 2016, Huatai’s Gong and Yu said. Huatai raised Nine Dragons Paper and Lee & Man Paper Manufacturing Ltd. to buy from hold.
Long Chen Paper has risen 49 percent this year, compared with a 3.4 percent gain in the Bloomberg World Forest Products & Paper Index. Paolung International has soared 53 percent. Hon Hai is down 0.6 percent after posting its first annual sales decline on record.
“Paper stocks are only just starting to rise,” said Michael On, president of Taipei-based Beyond Asset Management Co.
(Updates stock prices.)